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German inflation surges to 13-year high of 3.4%

German economy updates

German inflation has risen to its highest level since 2008, driven by rebounding economic activity, higher energy prices and disruption to global supply chains.

Germany’s harmonised index of consumer prices rose to 3.4 per cent in August from a year earlier, up from 3.1 per cent in July. The increase is likely to intensify concerns that the eurozone’s ultra-loose monetary policy could cause its largest economy to overheat.

The European Central Bank’s governing council will meet next week to discuss whether the bloc’s economy is bouncing back strongly enough from the impact of the coronavirus pandemic to justify a slowdown in the pace of its bond-buying.

François Villeroy de Galhau, governor of France’s central bank and an ECB council member, said in a radio interview on Monday that the decision “should take account” of the improvement in financing conditions over the summer.

The ECB expects this year’s rise in inflation to be “transitory” and predicts price growth will fade next year. Eurozone inflation is forecast to rise from 2.2 per cent in July to 2.8 per cent in August when the figures are released on Tuesday.

“Today’s inflation surge will do very little to bridge the gap between the two inflation camps; one arguing that inflation drivers are transitory and that base effects will disappear or even reverse next year and the other seeing a broad risk of accelerating inflation,” said Carsten Brzeski, head of macro research at ING.

Inflation is rising in many countries as the world economy rebounds from the impact of the pandemic, increasing pressure on central banks to start winding back the monetary stimulus they launched last year.

Jay Powell, chair of the US Federal Reserve, said last week the central bank planned to start scaling back its asset purchases this year.

The last time German inflation reached 3.4 per cent was in the build-up to the 2008 financial crisis. It is now rising faster than most other European countries due in part to one-off effects, such as its reversal of last year’s temporary cut in value added tax.

However, there are few signs that the price pressures are feeding through into wages. In the three months to June, wages including one-off payments rose 1.9 per cent from the same period a year ago, the Federal Statistical Office said on Monday.

Last year’s VAT cut and drop in oil prices would be reflected in higher inflation for the rest of this year, it added.

Prices of manufactured goods in particular are being driven higher as German factories grapple with spiralling costs and shortages of materials such as semiconductors, as well as bottlenecks on container shipping routes.

German goods inflation rose to 5.6 per cent in August, while services inflation hit 2.5 per cent.

Producer prices for German industrial products rose 10.4 per cent in July — the highest increase since 1975 during the oil crisis when headline inflation peaked at a postwar high of close to 8 per cent. Supply chain disruption caused import prices to rise 15 per cent in July, the fastest pace for 40 years.

“In the coming months, the bottlenecks that are likely to persist for the time being could cause the prices of some goods to rise further and thus push inflation — depending on the development of energy prices — towards 4.5 per cent or even 5 per cent,” said Ralph Solveen, an economist at Commerzbank. “In 2022, however, the inflation rate should fall again.”

Earlier on Thursday, Spain’s statistical agency said its inflation rate was 3.3 per cent in August, its highest level since 2012 and up from 2.9 per cent in July, boosted by higher electricity prices.


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